What is Unearned Interest?
Unearned interest is a term that is used to identify the amount of interest that is collected on a loan before the borrower has had sufficient time to benefit from the principal of the loan. Just about every type of loan structure today commonly involves the payment of unearned interest during the early months of the loan repayment period. As the borrower begins to reap benefits from the assets acquired with the loan, the advanced interest increasingly is viewed as earned by the lender. When it comes to such standard consumer loans as mortgages and auto loans, the terms and conditions of the loan contract will include details about the amount of interest collected in advance. This will often follow a pattern of each monthly payment going toward the interest that is anticipated to apply to the loan over the series of payments specified. Depending on the terms, a larger percentage of each monthly payment will go toward unearned interest during the first half of the loan period. As the ba
